Dear Mr. Berko: 

We have a $70,000 certificate of deposit that comes due next month. We have two choices for this money. We could help our son to expand his veterinary practice with a six-year loan at 6 percent. I know you don’t like lending money to family, and I understand all the reasons and know the pitfalls. Or a broker we know advises us to invest $20,000 in a fixed-income annuity guaranteeing 5 percent for seven years, $20,000 in a preferred stock investment trust yielding 6.25 percent and $20,000 in a high-yield corporate bond fund at 6.75 percent. Then he suggested taking a gamble and investing $10,000 in the Fidelity Select Biotechnology Portfolio. I told him we’re worried that if rates went up, the value of our investments would drop. He said that because we would be getting three times more interest than CDs pay, we shouldn’t have to worry. He says that the rise in interest rates is temporary and that the Federal Reserve will keep rates low because higher rates would hurt stocks and the economy. He thinks that a year from now, rates will be the same and that there’s no reason for higher rates. Mr. Berko, if rates rise, how high do you think they can go? If rates fall, how low do you think they will go? We need your advice as soon as possible. We must make a decision in 10 days. 

N.L., Wilmington, N.C.


Dear N.L.: 

It’s more than unanimous. Twelve out of 10 people believe rates are headed higher, not lower. Interest rates will rise higher than many people think they can, but they will not rise so high as others think they will. So if you value your wealth, I wouldn’t care to be sitting with those fixed-income investments next year or in the following years. I suspect that this adviser has a leakage of endogenous chemicals from the synaptic vesicles into his brainpan. This neurotransmitter leakage probably short-circuited his neural pathways so that his brain’s interpretation of information, which is rationally processed by most observers, is badly skewed. This guy is dangerous to your wealth. If you have a good relationship with your veterinarian son, I’d lend him that money faster than he could say “ruff ruff” or “meow” or “moo.” D.V.M.s make more than most M.D.s today, and their patients are nicer!
   
But I do like his Fidelity Select Biotechnology Portfolio (FBIOX-$178.73) recommendation. It baffles me that he’s capable of recommending a jewel as bright as this mutual fund. I suppose his choice proves even a blind hog can find an acorn once in a while. This five-star no-load fund, which has a $5.8 billion portfolio, has been one of my favorites for years. FBIOX’s average load-adjusted return for the past 10 years has been 13.1 percent. It’s been 19.2 percent for the past five years and 40.7 percent for the past three years. So far this year, it’s 50.4 percent. And because it has consistently outperformed the Dow Jones industrial average, the Nasdaq composite and the Standard & Poor’s 500 index, I’d not hesitate a picosecond to include FBIOX in any portfolio – small or large.

Now, be mindful that lending $70,000 to your son is a serious business venture, not a personal loan. Treat it with the cool caution you would an important business deal. You begin by thinking of your son as a total stranger. The loan must be handled as an arm’s-length transaction. Begin by employing an attorney (your son should pay those fees), who will prepare the important loan agreements and documents containing the same caveats that would be found in a loan agreement used by most commercial banks. All the details must be spelled out clearly so there is no chance of misunderstanding. If, for some reason, the loan goes bad, you are entitled to a tax deduction; mark it as a bad debt on your tax return. But in order for you to claim this deduction, the Internal Revenue Service will want to know that you have done everything you can to get the money back, including taking the borrower to court. So make this loan only if you’re prepared to take your son to court.